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  • Writer's pictureMAC10

Bank Run 2024

One year ago, Powell shocked markets by stating that the Fed was not planning to pause rate hikes any time soon. Heading into the Jan/Feb FOMC, markets had decided that the Fed rate hiking cycle was over, so it was up to Powell to dispel that delusion. Markets were not happy. That week was the peak for markets and in particular for regional banks which imploded soon after.

"Markets, however, were looking to this week’s meeting for signs that the Fed would be ending the rate increases soon. But the statement provided no such signals"

Fast forward one year and Powell had to do the same thing all over again - pound down market expectations for a dovish pivot that he set at the last FOMC in December:

"Powell’s pushback against investors’ bets marked a contrast to the Fed chair’s remarks in mid-December, when his dovish rhetoric raised some market expectations for as many as six quarter-point cuts beginning in early spring"

In the chart below we see the two Jan/Feb FOMC meetings overlaid on the regional banks chart. This year regional banks are far weaker than they were last year and the first bank already imploded this week - New York Community Bancorp. We also see in the chart that the "BTFP" Bank Term Lending Facility bailout program began at the market lows. The purpose of the program was to allow banks to swap insolvent assets in exchange for fresh cash to meet deposit redemptions. Had the Fed not created this facility, many more banks would have become insolvent due to forced selling of underwater assets, particularly long-term Treasury bonds bought in massive magnitudes during the pandemic. Pandemic stimulus programs - monetized by the Fed - caused banks to be inundated with deposits at 0%. So, banks not having any loan demand, bought long-term bonds assuming that interest rates would remain low indefinitely. Then when the pandemic ended, the Fed raised interest rates 21 quarter points imploding banks.

Now, the BTFP program is set to end in just over a month (March 11th) despite still being heavily in demand:

"Raising the rate was widely viewed as a way to arrest a vexing rise in borrowing at the facility despite no apparent signs of bank stress. Last week banks had borrowed $167.8 billion from the facility"

FR: In other words, banks were clearly reaching for more liquidity so the Fed inexplicably raised rates to deter heavy borrowing and one week later a bank implodes at the same time the FOMC says rates will be higher for longer. This is Keystone Kops monetary policy.

To be sure, NY Community Bancorp has not been seized yet by the FDIC, however its massive stock decline is deja vu of banks that imploded last year. And we also learned that their problems are primarily related to commercial real estate which is a global $560 billion problem:

"The US commercial real estate market has been in turmoil since the onset of the Covid-19 pandemic. But New York Community Bancorp and Japan’s Aozora Bank Ltd. delivered a reminder that some lenders are only just beginning to feel the pain"

New York Community Bancorp’s decisions to slash its dividend and stockpile reserves sent its stock down a record 38% on Wednesday, with the fallout dragging the shares to a 23-year low on Thursday. The selling bled overnight into Europe and Asia, where Tokyo-based Aozora plunged more than 20% after warning of US commercial-property losses and Frankfurt’s Deutsche Bank AG more than quadrupled its US real estate loss provisions"


Here's the part of this that all investors need to understand. Last year, the FDIC stepped in and bailed out ALL of the depositors who were affected by the 2023 bank run shown above - both insured and uninsured alike.

Then in May of 2023 they put out a memorandum stating that going forward uninsured deposit bailouts i.e. > $250k were no longer feasible, because they are running out of funds.

May 1, 2023:

"Following the 2008–2013 banking crisis, the reliance by the U.S. banking system on uninsured deposits grew dramatically, both in dollar volume and as a proportion of overall deposit funding. From year-end 2009 through year-end 2022, uninsured domestic deposits at FDIC-institutions increased at an annualized rate of 9.8 percent, from $2.3 trillion to $7.7 trillion (43% of U.S. deposits)"

"Uninsured depositor runs triggered the failures of Silicon Valley Bank and Signature Bank in March 2023, respectively the second and third largest bank failures in the FDIC’s history"

The report goes on to say that the FDIC recommends that in the future uninsured deposits (deposit > $250k) should only be covered by the FDIC IF they are "business payment accounts". The types of accounts that are used to make payroll. They do not recommend extending unlimited coverage to private wealth accounts. A decision that would expose trillions of dollars to massive losses and would spur mass deposit exodus in the event of uninsured bank failure. In any event, nothing has been passed by Congress so at present the entire banking system is exposed to massive political risk in what is going to be a highly acrimonious year.

In addition, consider that the Fed now has cover NOT to lower rates during an election year which means that they can avoid the wrath of Trump and a repeat of his infamous September 2016 rant that the "Fed is being political".

"Federal Reserve Chair Jerome Powell's efforts to navigate monetary policy through a white-hot election year just got more complicated. A stronger-than-expected jobs report released Friday morning that surprised Wall Street means the central bank is even more likely to move any consideration of interest rate cuts closer to Election Day"

That places the Fed on a collision course with figures on both sides of the political divide who are ready to attack Powell if the cuts come too soon or too late for their liking. Those critics include Republican front-runner Donald Trump, who offered a new warning Friday likely to raise the pressure on Powell."

Last but not least, I would point out that as of the third quarter, unrealized bank losses have in no way been "fixed" during the past year:

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